Double-Digit Gains in the Timber and Paper Industry

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you’d like to add some timber and paper stocks to your portfolio, the Guggenheim Timber ETF (NYSEMKT: CUT) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is 0.70%. The fund is a bit on the small side, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

Why timber and paper? Paper may be threatened by the spread of digital communications, but we’ll still need paper for packaging and other purposes. Timber, meanwhile, remains a critical part of the recovering home construction industry. A bunch of these companies have restructured themselves into real estate investment trusts (REITs), which are required to pay out most of their earnings as dividends.

More than a handful of timber and paper companies had strong performances over the past year. Weyerhaeuser (NYSE: WY) , up 45% over the past year, is closely tied to the housing market and its large scale gives it a competitive edge. The stock, a REIT, recently yielded 2.3%. The company’s recent strong results were more due to land sales than operational performance, though, which isn’t ideal. And with a forward P/E near 24, the stock doesn’t seem a bargain now.

Rayonier (NYSE: RYN) gained 31%, and sports a forward P/E of nearly 22, also on the steep side. It’s also a REIT, and yields about 3.1%. It’s also very tied to the construction market, as it’s a major tree and timber producer. One strength of Rayonier is its international diversification -- it generates considerable revenue abroad in places such as China, Europe, and Japan. Its fourth-quarter results were strong, with management expecting a strong 2013 as well.

Plum Creek Timber (NYSE: PCL) advanced 30%, with management recently noting rising prices for lumber and wood panels, which bodes well for the company. It's bullish due to growth in demand for building materials. In an interesting move, Plum Creek Timber recently invested in royalties from a crushed stone income stream.

International Paper (NYSE: IP) gained 30%, and is merging with Temple-Inland (UNKNOWN: TIN.DL2) . It recently hit a 52-week high, and its dividend yielded 2.3%. It also just enjoyed an analyst upgrade.

The big picture Demand for timber and paper isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

To learn more about a few ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out The Motley Fool's special free report "3 ETFs Set to Soar During the Recovery." Just click here to access it now.

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